The Chairman of the Presidential Tax Reform Committee, Taiwo Oyedele, has cautioned that allowing state governments to collect Value Added Tax (VAT) could result in chaos.
Speaking during an interview on Friday, Oyedele explained that a similar approach was attempted in the 1980s with sales tax, but the sub-national governments failed to generate significant revenue through it.
He argued that state-level VAT collection would lead to reduced revenue and create challenges for businesses nationwide.
Oyedele further noted that the omission of to collection as a federal responsibility in the 1999 Constitution was an oversight, considering it was one of the country’s highest revenue sources at the time.
By 1999, we were writing the constitution because we now have the 4th republic. But what we did was to just replicate the 1979 constitution. In 1979, there was no VAT. So there was no VAT in the 1979 constitution.
“However, by 1999, we have implemented VAT for about five years. And it was becoming our top revenue tax. How on earth did we forget to put it in the 1999 constitution. Because it wasn’t stated in the 1999 constitution, lawyers will state to you that it’s residual matter.
“Because it’s a residual matter means it belongs to the subnational. That’s why Rivers State and Lagos have been to court and won. If we get a judgement from the supreme court today, it will tell you that VAT should be collected and administered by states. That will be chaotic. States will collect less, businesses will suffer, the economy would retrogress,” Oyedele said.
Backstory
Nairametrics previously reported that the Northern Governors Forum, chaired by the Gombe State Governor, has rejected the derivation-based model proposed for Value Added Tax (VAT) distribution in the new tax bill currently under deliberation in the National Assembly.
- In a communiqué signed by the Chairman of the Forum, Governor Muhammed Inuwa Yahaya of Gombe State, following a meeting between northern elders and governors, the Forum criticized the proposal, stating that it goes against the interests of the North and other sub-nationals.
- The Forum also urged members of the National Assembly to oppose the legislation and any similar proposals that could undermine the interests of the northern region.
The new tax bill, under consideration in the National Assembly, proposes a derivation principle in the allocation of VAT revenues between the federal government and sub-national entities.
What You Should Know
Currently, under Section 40 of the VAT Act, VAT revenue is distributed as follows: 15% to the Federal Government, 50% to the States and Federal Capital Territory (FCT), and 35% to Local Governments. The allocation to states and local governments includes a derivation principle of at least 20%.
- Although not explicitly stated in the VAT Act, other factors influencing the distribution include 50% based on equality and 30% based on population. Additionally, 4% of collections are allocated to the Federal Inland Revenue Service (FIRS) as a collection fee, and 2% to the Nigeria Customs Service (NCS) for import VAT.
- Several southern states have voiced dissatisfaction with the current VAT distribution formula, arguing that they do not receive a fair share.
In 2021, the Rivers State Government sued the Federal Inland Revenue Service (FIRS) at the Federal High Court in Port Harcourt and secured a judgment in its favor, affirming that the state government is entitled to collect VAT within its jurisdiction. This ruling implied that each state would be responsible for administering VAT within its territory.